The actions of policymakers can be crucial drivers of financial market movements. Monetary policy outcomes directly drive markets, and so do changing expectations for how it will evolve. Brexit sometimes dominants as a driver of those expectations and has been a deeply researched topic here for years before the referendum was even called.
Monetary policy surprises can arise from differences in how the fundamental outlook is perceived or a misunderstanding of how policymakers will respond to it. Replicating Bank of England models for the real economy and its reaction function provides a formal framework to process news through. Doing so helps Heteronomics to anticipate policy surprises and the associated financial market movements.
Fundamental news can come from a variety of shocks, each with different effects on the outlook for output and inflation. Heteronomics categorises news into a mixture of demand, supply, inflation, and various financial shocks using a formulaic approach.
Combined with the impulse response functions to these shocks from the Bank of England's model, Heteronomics conducts regular mechanical updates to ascertain how the outlook may be evolving in the eyes of monetary policymakers.
The Bank of England has a 2% inflation target, but it would not be reasonable to attempt to hit that at all times. There is a trade-off between excess inflation and spare capacity in the economy, where the former might be tolerated if the latter seems sufficiently disinflationary. Different policymakers can reasonably hold different preferences about the trade-off between these two things, but the balance, with some augmentations, is central to the policy deliberations.
Using mechanical updates of model news and assumptions for how the MPC might vary its judgements allows for shifts in the trade-off to be anticipated. Growing margins of excess demand and inflation imply greater hawkish pressure, while the opposite applies in the dovish direction. This framework provides the formal core of the framework Heteronomics uses to consistently anticipate the response of policy to real economic developments.
Many commentators struggle to distinguish their perceptions of what should happen from their expectations for what will happen. That can be a particular problem with political matters, where there isn't a simple objective function like with monetary policy. Reasonable people might reasonably place different weights on various factors. Dismissing other views rather than seeking to understand them is a recipe for being wrong. Unfortunately, Brexit brings out the worst such tendencies and benefits no-one.
Heteronomics takes a genuinely impartial approach to ensure its guidance steers clear of avoidable bias. That goes beyond the avoidance of any active political lobbying, financing or campaigning into an attempt to neutralise any related commercial risks so the business can remain agnostic to any outcomes.
Unencumbered analysis of political events seeks to dispassionately understand the motivations of any relevant actors. On Brexit, that goes beyond the UK, to the European Council, Commission, and member states. Optimal forecasts are always informed by the nexus of these political reaction functions and the legal constraints, being sure to avoid the wood being lost for all the trees.